(Bloomberg) -- Quant Mutual Fund took India’s market by storm in recent years, using computer models to generate 560% returns and boost assets by almost 400-fold. That spectacular growth is under threat in India’s latest regulatory probe. 

The Securities and Exchange Board of India is reviewing alleged front-running trades by Quant Mutual Fund employees, people familiar with the matter said. The Mumbai-based firm, whose assets have soared to 930 billion rupees ($11 billion) from 2.4 billion rupees in 2019, said it received inquiries from the regulator and is fully complying with the requests.

For India’s mutual fund investors, the probe is reminiscent of recent cases that sparked waves of redemptions at once high-flying money managers. In 2022, SEBI found illegal trades by employees of Axis Mutual Fund, while HDFC Asset Management Co. suffered a similar fate. 

“When such news comes, investors don’t wait and think — they redeem,” said Vidya Bala, co-founder at investment platform Primeinvestor.in, which has recommended exiting from Quant Mutual’s funds. Axis Mutual saw significant redemption pressure and is “still struggling to come back to their past glory,” she said.

Read: Front-Running Probe Ensnares $11 Billion Fund Quant Mutual

The probe is a potential blow to Sandeep S Tandon, who started Quant Group in 2008 to manage money for India’s newly minted millionaires at the peak of the global financial crisis. While most of the world was stung by the recession that followed, India recovered quickly, buoyed by government stimulus. 

Tandon smelled an opportunity.

He called the bottom in March 2009 and started using computer models to outperform the market. Quantitative modeling, which was upending Wall Street in the years leading up to and after the financial crisis, combined with fundamental research became Tandon’s calling card for wealthy clients.

“As a firm, we give one third weight to fundamentals, one third to behavior and one third to liquidity,” he said in a rare public demonstration of his investment framework at a conference in 2014. “We are building the business around research, which is close to my heart.”

Tandon, who started at GIC Mutual Fund, and his firm didn’t immediately respond to Bloomberg queries for this story.

He generally refuses to divulge the specifics of his stock-picking system during client meetings, or with mutual fund distributors who sell his products to retail investors, according to people with knowledge of the matter. Nor does the firm actively market its funds, the people said, declining to be identified as they aren’t authorized to speak publicly.

“Certain investment models are suited for hedge funds or alternate investment funds,” said Shyam Sekhar, founder of ithought Financial Consulting LLP in Chennai. “They are not suited for mutual funds because of the kind of disclosures the mutual funds have to make.”

Small Caps

Still, Quant Mutual Fund foresaw rallies in India’s small-cap stocks in 2021 and state-owned companies in 2023, according to holdings disclosed on fact-sheets. Tandon said in interviews with local media that they started buying smaller companies as early as 2020.

Its smallcap fund grew 88% the next year, beating index returns of 63%, according to data compiled by Bloomberg. However, the firm was exposed to Adani Group firms — with as much as 20% of assets at the time, according to one of the people — on the eve of Hindenburg Research’s disclosure of short interest on the ports-to-power conglomerate last year. 

As the Adani Group stocks plunged, wiping out over $150 billion of market value at one point, Quant Mutual Fund exited the positions, Live Mint reported in February 2023, citing an unidentified person familiar with its holdings.

Beating Peers

Quant Mutual Fund’s intuition for timing markets to generate returns was a break from the buy-and-hold model adopted by many of his bigger peers in India, who idolized US investing heroes like Warren Buffett.

“Our money management style cannot be static: buy, hold and then you forget it. That’s not the model we practice,” he told AlphaStreet India earlier this month. “We have to continuously rebalance our portfolio, reconstruct our portfolio based on the risk-on, risk-off environment.”

Tandon carried that philosophy into the asset management business of Escorts Mutual Fund, which he bought in 2018. His largest fund — Quant Small Cap with over 200 billion rupees in assets — has returned over 43% on an annual basis since 2019. 

As the asset manager grew, Tandon demonstrated that size matters. The additional heft gave his fund better access to initial public offerings just as they began to proliferate in the world’s fastest-growing developing economy. The fund also dabbled in derivatives to juice returns at lower costs.

“We are getting size, this is one important benefit which we are getting,” he said in the AlphaStreet interview. That lets the fund get a higher allocation, which allows it to make “extraordinary money,” he said.

Also read: There’s Never Been a Better Time for India’s Mutual Funds

That dizzying growth is now at risk from India’s regulators, which have been cracking down on several fronts to rein in excesses in the nation’s financial markets. Recent moves by the Reserve Bank of India and the stock market watchdog include clamping down on fintech giant Paytm to IPO financing and increased scrutiny of options trading.

The probe may lead Tandon to revamp its risk management systems and hire more experienced hands, according to people familiar with the firm. 

For Quant Mutual Fund, a ruling from the regulator will likely take months as it scrutinizes documents seized from offices in Mumbai and other cities. SEBI’s surveillance alerts will be corroborated with similar trade records at Quant Mutual Fund to determine if there were any illegal gains made from the trades, according to previous orders issued by the regulator.

“Considering the nature of development and the value at risk in case of adversity on the liquidity and pricing front, we retain ratings on all funds managed by Quant Mutual Fund while assigning a ‘Watch’ outlook indicating sensitivity to the developing situation,” according to a Fisdom Research report.

Probe Impact

Tandon will want to avoid the impact the probes had on rivals. 

Last year, the regulator ordered that 300 million rupees of ill-gotten gains made by employees of Axis Mutual Fund be impounded. As many as 21 people involved in the front-running case were banned from trading. Axis Mutual Fund’s growth has slowed since then, with its assets under management expanding by 5.6% between March 2022 and 2024, while the industry saw gains of more than 30%, according to data from MorningStar.

Front-running is the trading of stocks by someone privy to information about an impending transaction that will move prices. As in many markets, the practice is illegal in India. 

“The fund is liked for its returns, not its corporate governance,” said Dhirendra Kumar, founder and chief executive officer at investment research platform Value Research. “Until the SEBI’s order comes out, its investors who are there for the returns will stick around but others who may be worried could pull out.”

--With assistance from Ravil Shirodkar, Alex Gabriel Simon and Ashutosh Joshi.

(Adds fund research report in 23rd paragraph)

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